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Big Hurdle Ahead For Facebook, Despite 2019's 50% Rally

By (Haris Anwar/ 04, 2019 16:45
Big Hurdle Ahead For Facebook, Despite 2019's 50% Rally
By (Haris Anwar/   |  Dec 04, 2019 16:45
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Facebook's (NASDAQ:FB) shares have soared this year, signaling that investors are confident the social media giant has successfully overcome the major challenges it was confronting and is now firmly back on the path to further growth.

Indeed, the stock has gained more than 50% to date in 2019 and is currently trading close to its all-time high of $211.50, defying regulatory probes, fines and general public mistrust of the platform. Shares closed yesterday's session at $198.82, after falling 0.4%.

The biggest surprise in Facebook's 2019 performance is not only that the company regained lost ground, but also that it performed significantly better than its biggest rival Google, owned by Alphabet (NASDAQ:GOOGL), whose stock has gained 25% during the same period.

Facebook Weekly Price Chart
Facebook Weekly Price Chart

This strong rebound comes after a tumultuous 2018 when investor confidence in the company was shaken badly by a series of high-profile setbacks, including data breaches, user privacy concerns and the political manipulation of its platform.

Though Facebook's troubles are far from over, with CEO Mark Zuckerberg warning of a “tough year” ahead, the company continues to show resilience in its earnings. For the third quarter that ended on Sept. 30, Facebook reported that new users are still flocking to its apps, with 2.8 billion people now using at least one of its services monthly.

In the quarter, Facebook added three million users in the U.S. and Canada—the biggest number of sequential adds since well before last year’s Cambridge Analytica scandal. That surge in consumer engagement boosted both sales and operating margins and the reported $17.7 billion in total sales and $6.1 billion profit both exceeded analyst estimates.

Costs of Tighter Regulations

So what's next for 2020, a U.S. presidential election year, as demands escalate that social media influence on voters is curbed and ads targeting particular groups are banned?

Such pressures and more intense scrutiny following the U.S. elections are some risks that analysts are highlighting for Facebook's stock as we approach the new year. Facebook is grappling with “a tornado of privacy, security and regulatory issues” and the “costs of tighter regulation are kicking in,” according to a recent research note by Societe Generale. The note also said that Facebook’s “pivotal” guidance for capital expenditures reflects the company’s higher exposure to privacy and security concerns.

Societe Generale is one of only two firms on Wall Street that recommend selling Facebook shares, with the 12-month price target of $120 a share. Forty-seven firms recommend buying the stock, while five analysts have the equivalent of a neutral rating.

In our view, Facebook has already shown it could be a winner in this tug of war between decelerating growth and the need to spend more to satisfy regulators. In the face of nearly constant negative news, the social-media giant has still managed to grow advertising revenue more than 25% year-over-year each quarter.

Going forward, there's no guarantee that the issues facing the world’s largest social media platform will dissipate. During the latest conference call with analysts in October, the company’s chief financial officer warned that Facebook’s slowdown in revenue growth could extend beyond this year, as growing limitations on how much personal data it can collect and use for ads will make it tough to profit from growth in advertising sales.

Regulatory oversight and antitrust probes will continue to pose questions about social media companies’ future growth as politicians and regulators try to put together a set of rules to control and stem misuse. But when it comes to Facebook, investors are becoming more confident about Zuckerberg’s ability to produce market-beating returns, while downplaying the company’s conservative tone.

What’s keeping investors excited about Facebook’s prospects is its ability to continue attracting advertising dollars with its 2.8 billion users on different platforms. A key growth area is the company’s Stories features, which are full-screen photos and videos users can post on Facebook, Instagram, WhatsApp and Messenger.

Facebook’s move into e-commerce via Instagram and WhatsApp could add billions of dollars to its revenue within a few years. The Instagram photo-sharing app, which has ads in its photo feed and recently added e-commerce tools, is becoming a more significant part of the business.

Bottom Line

After a powerful rally this year, Facebook shares are well-positioned to weather any new setbacks in 2020. FB’s continued ability to drive engagement and monetization of its existing properties make its stock a solid long-term bet, despite the challenging year ahead. We recommend buying this stock on any potential weakness in 2020.

Big Hurdle Ahead For Facebook, Despite 2019's 50% Rally

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Big Hurdle Ahead For Facebook, Despite 2019's 50% Rally

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